Citigroup Settles Subprime Mortgage Case For $7 Billion

Citigroup has agreed to settle allegations that it defrauded investors in the years leading up to the financial crisis. The settlement requires Citigroup to pay $7 billion. Two and a half billion will go toward mortgage relief for homeowners. Now, this settlement involves mortgage-backed securities the bank packaged and sold to investors, and it was announced this morning by U.S. Attorney General Eric Holder. We're going to talk this through with NPR's Jim Zarroli who's on the line. Jim, good morning.

JIM ZARROLI, BYLINE: Good morning.

INSKEEP: So what exactly did Citigroup do that made it legally liable?

ZARROLI: Well, we are still cleaning up the mess caused by the sub-prime mortgage crisis, you know, after five years.

INSKEEP: Sure.

ZARROLI: This has to do with those mortgage-backed securities that a lot of banks were selling back when the mortgage business was overheated. Essentially, Citigroup, like the others, took - they took a lot of different mortgages and pooled them together and sold them as securities. What the investors didn't know was that a lot of these underlying mortgages were fraudulent. They were, you know, based on faulty income statements or, you know, exaggerated assessments of the value of a property. So a lot of them ended up losing money and a lot of investors took a big hit.

INSKEEP: I suppose a big question here is whether Citigroup was aware that it was selling bogus securities.

ZARROLI: Well, yeah. Citigroup and its employees knew there was a problem. The bank had hired firms to go through the mortgage pools, and these firms would come back and warn them, you know, they should reject some of the mortgages on it. The Justice Department cited an email from a trader at Citigroup in which he said something like - he said, I went through the diligence report, and I think we should start praying. I would not be surprised if half of these loans went down. But the bank insisted anyway that these faulty mortgages be accepted. They were sent out to investors and over time, you know, the problem just mushroomed. Here was Eric Holder at a press conference this morning.

ERIC HOLDER: They misrepresented the facts, including the level of risk. They sold defective loans to countless investors including federally insured financial institutions, and they made false statements to investors.

INSKEEP: OK, so that's what Eric Holder says they did. Citigroup has agreed to settle - $7 billion payment. How does that affect the bottom line of a big bank?

ZARROLI: Well, this is a huge and very profitable bank. I mean it would have made $4 billion last quarter before the settlement. Now, the settlement is going to take a big chunk out of that. Citigroup gets to deduct part of it, but it's still going to be a pretty big bite out of the profits. Citigroup actually tried to hold out for a much lower penalty. The negotiations went on a long time. They were very contentious. They were very far apart in the beginning, but I think in the end Citigroup decided to settle. I think from their perspective, as with the other banks, you know, it simply wanted to put this behind it and move on.

INSKEEP: They weren't the only bank selling these kinds of securities. What does this mean for other banks?

ZARROLI: Yeah, I mean we heard from Tony West, the assistant attorney general in charge of the civil division this morning, who said, yeah, the public should expect more settlements, and they should expect them pretty soon. We had that big settlement late last year with JPMorgan Chase. You know, I think the federal government has been criticized over the years for not doing more to punish the banks - a lot of people very unhappy. So I think they're trying to convince the public that they're on top of this - that they're going to punish any wrongdoing they can find by the bank. Part of this money, $2.5 billion, will go toward relief for homeowners who were hurt in the subprime mortgage crisis. That's not a lot of money when you consider how much was lost.

INSKEEP: Yeah.

ZARROLI: But it is - it's designed to make a statement about how far the federal government is willing to go to stop this kind of wrongdoing.

INSKEEP: Jim, thanks very much.

ZARROLI: You're welcome.

INSKEEP: That's NPR's Jim Zarroli reporting today on a settlement for Citigroup which has agreed to pay $7 billion for its behavior before the financial crisis. Transcript provided by NPR, Copyright NPR.